Can the System Carry Perpetual Depression?

THE wording of this question may be considered invidious, since no defender of the present system admits that the present depression is anything more than a temporary or emergency phase. The assumption that the depression is an emergency, and that recovery must be around the corner or already in progress, is fast becoming untenable. Towards the middle of 1935 there had become quite pronounced in conservative and even radical circles an optimistic reporting of signs of world-wide business recovery. Maxwell S. Stewart, a representative liberal critic of economic conditions, gives expression to this idea in a contribution on “The Facts: Employment, Standards of Living and the National Income,” to a symposium on Economic Planning edited by Mary L. Flederus and Mary Van Kleeck, when he says that for two and a half years business conditions throughout the world have been definitely on the upgrade. Similarly optimistic statements about the business trend can be found prominently emphasized in the public utterances of publicists like Walter Lippmann or representative spokesmen of business conservatism, all of whom cite this business recovery as the major reason for letting up on the reform features of the New Deal and allowing a larger measure of economic freedom both to private initiative and to the unemployed to find jobs or starve.

These optimistic findings of business recovery throughout the world are based largely on misleading citations of statistics which show greater economic activity or steadiness in 1934 and 1935 than could be seen in 1931 and 1932. They take little account of the New Deal in the United States, a major war of conquest being waged by Japan for the past two years, a national government in Great Britain engaged in all sorts of enterprises of state intervention in the economic process, and with fascism or communism in full blast in the other larger nations except France, where admittedly there is an economic crisis unmodified by what even an optimist would call business recovery.

The indices of industrial production, for instance, taking those of the Federal Reserve Board economists for reference, show an improvement from a low of 64 (1923-1925-100) for the year 1932, to 76 for 1933, 79 for 1934, and 89 for April 1935. It is not considered how much of this increase in industrial production is due to deficit government spending, inaugurated as a continuing policy since 1932, or to the Japanese war, or to war preparations all over Europe, and in this country, which have expanded enormously since 1932.

The principal index or group of indications seized upon by the optimist of 1935, of course, may be said to lie in the field of psychology. There is more confidence in banks and a better feeling among the better-off about the general state of economic affairs-all reflected in higher security price levels. It is not considered how much this improved feeling is due to the fact that everyone now believes that Government will allow no further deflation or large scale liquidation, that the business enterpriser and the gambler on price changes have done extremely well, with some exceptions, on the government’s price and currency manipulation policies, and that it is generally thought that the areas of social unrest are now being satisfactorily relieved by the dole. It is forgotten that increased production and better feeling have not reduced unemployment or increased new capital investment.

If the term business recovery has any useful meaning, the trend called recovery must be characterized by an increase in new investment and by a decrease in unemployment. As for unemployment, the figures of the International Labor Office of the League of Nations may be taken for the world at large, or the figures of the American Federation of Labor for the United States. Whatever the figures taken for the trend in employment during the two years preceding June 1, 1935, they will not show any marked change for the better in the number of the unemployed. Production has been increased since the bottoms of 1932 were touched, but employment has not been increased accordingly.

As for bank loans to private enterprise, they have declined in total volume by about fifty per cent, or over twenty billion dollars, during the six years of the depression, and they have declined slightly since 1933. Their shrinkage continues in 1935 in spite of a mild inflation of prices. From June, 1934 to June, 1935, bank loans declined by about a billion dollars. Perhaps the most conclusive index of business conditions is that furnished by the amount of money going into new capital issues of bonds and stocks to finance private enterprise. These figures are easily obtainable, and are compiled and published monthly by the Commercial and Financial Chronicle. If more money is being put by investors into industry and trade to create new productive plant or working capital, then there is recovery. If not, it cannot be said that there is any recovery in progress. Let the following table tell the story of new investment before and during the depression up to the middle of 1935:

NEW CAPITAL GOING INTO CORPORATE ISSUES OF STOCKS AND BONDS (The remainder of the new capital issues total is taken up by governmental and foreign issues.)

The figures indicate units of one million dollars.

1935 1934 1933 1937-1931 1930 1929 1928

For the entire year..... 178 160 325 1,763 4,944 8,639 6,079

For the first 6 months of each year............ 100 99 59 160 1,311 3,666 4,698 3,967

1927 1926 1925 1924 1923 1922 1921

For the entire year..... 5,391 4,357 4,100 3,322 7,702 2,335 1,823

For the first 6 months of each year............ 2,825 2,522 1,129 1,709 1,539 1,388 921

New capital going into private investment is index of business health. Such investment, as is seen from the preceding table, averaged over three billion two hundred million during the first six months of each year during the five the surest year period 1925-1929. For the same six months period during each of the years 1933-1935 the corresponding figure has averaged eighty-six million, or one hundred million for the first six months of 1935. The difference between three billion two hundred million and eighty-six million is some measure of the distance recovery has to travel from the middle of 1935 The difference between fifty-nine million for 1933 and one hundred million for 1935 gives some idea of the progress recovery has made. It seems a safe generalization to say that there can be no recovery until new capital going into corporate investments exceeds six billion a year, as occurred in 1927, 1928 and 1929. For the year 1935 new capital for private enterprise through the issue of securities bids fair to remain below two hundred million dollars.

The question posed for discussion in this chapter is not whether the well-to-do still have the means to maintain their living standards or to make new investments. In France, during the French Revolution, the privileged classes maintained their standards up to a few days before they went to the guillotine. The question is whether the system can carry the present and slowly increasing overhead costs of the depression with the present level of produced income and new investment. The question, Can the system carry the depression? may be divided into the questions, Can the system carry the depression until we enter the next big war? Can the system carry the depression and keep us out of the next war? and Can the system survive our participation in another war?

Back in the halcyon years between 1923 and 1929 it was the custom to boast that American workmen had too much self-respect to accept the dole and that American capitalists had too much spunk to stand for British taxation. After England went off the gold standard in September, 1931, American conservatism still found occasion to give thanks that we were not as other men were: our Constitution would not allow us to go off the gold standard. In 1935 the American Tories are pointing to the British situation with its unstable currency, huge dole, high taxes and crisis-coalition government as a model of recovery.

The fact, of course, is that the British have stabilized hard times better than any other large industrial nation. This they have succeeded in doing because, first, after the United States, they are the richest nation in the world and hence, after us, the best prepared to carry the overhead costs of a long depression; and, second, because the depression settled on England before it gripped any of the other industrial nations. England had no post-war reconstruction or inflationary boom on borrowed American money. She settled down right after the war to the depression and to carrying its liabilities-such as the unemployed. By 1935 she has grown so used to economic hard knocks that whenever there is a slight ease-up, it seems almost like recovery.

From the end of the War to September, 1931, when England went off gold, deflation was in course, but the slight fall in British gold prices had failed to expand British exports to their pre-war volume. Doubtless British export prices, whether on a pre-war sterling (gold) basis or on any devalued basis, could not have been lowered enough to expand British exports to the pre-war volume. Nations all over the world have been bent on increasing their economic independence of British manufacturing monopolies and, accordingly, maintaining nearly prohibitive tariffs against England’s basic exports at any possible price, thus dooming British textiles and heavy steel industries to perpetual depression. The British standard of living for the employed on wages and the unemployed on the dole, all necessarily constituting costs of British industrial production, has kept British real costs well above those of foreign competitors like the Japanese and central Europeans maintaining much lower living standards. Since September, 1931, when England went off gold and on the protectionist path, the British have been taking mild doses of trade tonics which cannot prove indefinitely stimulating and which will not square with the imperatives of the British situation. This dubious, though much touted, improvement in British domestic trade, often miscalled recovery, has been engineered in lieu of an unattainable recovery of the British export trade. It has been engineered mainly by fostering wholly new industries through the adoption of protective duties and by financing a construction boom in housing for the middle classes and equipping the new British industries made possible by protection. Britain cannot indefinitely maintain, out of her accumulated but now fast diminishing foreign surplus, the present British standard of living and the costs of imperial defense without the large profits that went with her pre-war foreign trade in which she enjoyed great bargaining advantage over the foreign customer. Once England went protectionist, she thereby admitted final defeat in foreign trade. She also thereby doomed herself to having the world arrayed against her for having closed her markets, just as the Spanish by a similar policy of closed economy for the Spanish colonies arrayed the rest of the world against Spain down to the opening of the 19th century when Spain finally lost most of her colonial empire. Yet the end of free trade and the adoption of protection have been depression necessities for Britain, but they are necessities which spell the doom of a liberal British imperialism. It remains to be seen whether a fascist British imperialism will survive or whether the British liberals will carry the empire down in their inevitable defeat.

Certain it now seems that, with the first war move, England’s liberal capitalistic and parliamentary system — the parent model of the system — such as the war has left it, will metamorphose overnight into a new authoritarian system. In this connection the much ignored fact is to be emphasized that the World War brought English institutions de facto far closer to fascism than they were before the war, or than our institutions are today. The post War trend in England towards the enlargement of the sphere and powers of the executive branch of the government has been the subject of a critical book by the Lord Chief Justice.

If there were not a chance that the United States can stay out of the next world war, as there surely is not for Great Britain, there would be little point to discussing the question whether American capitalism can carry the depression until the outbreak of that coming event. The chances are the next big war will break within five years and the chances are about fifty-fifty that public credit and ballyhoo under President Roosevelt can hold out until then.

What gives most point to this discussion is the consideration that there is a chance-not a good one, admittedly, but still a chance — for us to stay out of the next war. But can we do so and go on carrying the depression as we are now doing? The question really boils down to one of whether we shall get fascism through the war, or fascism before the war and without getting into the war. A fascism we developed before the war would in all probability be vastly better than a fascism we got in and out of a war. As for the question whether an American fascism would help or hinder our entry into war, a question discussed in a later chapter, it need only be said here that the liberal democracies have as bad a war record as, and larger military budgets today than, the fascist countries. There is, therefore, no reason to suppose that the war danger is any greater under fascism than under liberalism or communism.

Assuming that the next war comes within five years, let it be granted, for sake of argument, that the liberal capitalist system in the United States can carry the unemployed and the rotten financial situation until then. Then let us face the questions, first, whether liberal capitalism in the United States can go on carrying the depression and also keep us out of the war, and second, whether it can carry on through and survive our participation in a war, and third, whether it can carry the depression indefinitely if we succeed in staying out of the next war. The question whether liberal capitalism can go on carrying the depression and keep us out of war is the one which merits most careful study. Under any circumstances, the ability of the present system to go on carrying the depression is largely a question of how the institutional or mechanical factors, and how the peculiarly psychological or human behavior factors, behave under the strain.

In these fields, especially the last named, accurate scientific measurement and prediction of the future are out of the question, but certain probabilities may be deduced from known present conditions and past experiences with similar difficulties.

Now as to the more or less impersonal, mechanical and institutional phases of the credit and business behavior factors, we have the following data to reason from: First, carrying the depression means spending five billion a year on relief in 1935; second, playing good politics for the 1936 elections will mean spending this money without a corresponding rise in taxes; third, playing good politics for the farm vote and support of the business and speculative interests will mean continuing positive policies aimed at price-raising and price-maintaining, such as the subsidizing of agricultural scarcity; fourth, good politics will also dictate all sorts of policies to check a fall in prices or to prevent heavy deflation; fifth, the considerations just mentioned, and others too numerous to mention, indicate a price rise before the end of the next fiscal year, July 1st, 1936, to June 30th, 1937, which will make this fiscal year’s volume of relief cost a great deal more next year; sixth, the logic of these considerations is a bigger and bigger public deficit each year as long as the depression has to be financed by a government forced to play politics for reelection; seventh, the results of this sort of deficiteering must be a currency and credit debacle, the nature of which is too well known from post-War European experiences to need any detailed explanation.

So much for some of the more significant institutional or mechanical factors. The preceding chain of logic and logical sequences grips Mr. Roosevelt like the swift flowing current of a rapids. Only a superhuman effort on his part, or an unlikely series of lucky changes, can rescue him from the course outlined. If Mr. Roosevelt made such an effort, it would be along fascist lines or in the direction of fascism. I call these factors impersonal, mechanical and institutional because they leave Mr. Roosevelt no real choice. Having said A, he must say B, and so on until he has run dear through the alphabet.

As for the more typically psychological or human-behavior factors, we can surely reason from the following premises: First, pressure groups already in existence and yet to form will make bigger and more determined raids on the public treasury. If the government is to remain indefinitely committed to spending money according to the views of a favored few of the President’s inner circle, to check deflation, to raise prices, to induce recovery, to relieve suffering groups and interests, and to get votes for elections, why shouldn’t any group use whatever means it can command to get some of the easy money, and why shouldn’t any individual join as many money seeking pressure groups as he can and support their drives on the public treasury for what he can get out of them?

The question can be worded somewhat differently: If Senator Harrison and Mr. Hopkins (merely to cite at random two names of reputable public men whose counsels the President is understood to seek in money spending matters) have so much to say about spending so much money, why isn’t it good democracy to enlarge the list of such counselors and make it include representatives of other groups and interests? Why shouldn’t my friends and your friends get jobs as well as Mr. Harrison’s, Mr. Hopkins’, Mr. Farley’s and Mr. Tugwell’s friends? Why not, indeed? There is no law against it. And there can be no liberal law against it. Whatever is legal in the pursuit of self-interest or in the exercise of, or threat to exercise, the ballot has to be protected by the system. It is hardly less than funny to hear business men who have lobbied or supported lobbies all their lives for special privilege legislation, such as tariff-raising raids on the consumers, denounce the war veterans or some other group for playing the same legal, democratic game.

Why is it more unpatriotic or less public spirited for war veterans to try to get theirs by hook or crook than it was for the war profiteers during the war? It may be said that two wrongs do not make a right. But here there can be no question of right or wrong outside their definitions in terms of effective law. It is a matter of getting as much as you can within the law. That has always been good capitalism and good liberalism. If that is not considered right, there is no use talking about it, for nothing can be done about it as long as human nature and the law remain unchanged. And one of the values of the liberal-Constitution upholders must be the Constitutional right of minority group pressures to petition Congress and use the ballot as an instrument of coercion over Congressmen.

The disorders which are going first to strain the system to the breaking point in the near future under the present financing of relief will not be functional disturbances or mechanical breakdowns-of which there will be plenty in the institutional or impersonal machinery. They will rather be dynamic contradictions of national or collective interest, such all-too-human contradictions being legally and democratically asserted by minority pressure groups.

The good American individualism which is the boast of the Tories is exactly what is going to plague them most. For the leaders of the frustrated elite, the sinking members of the middle class who are by way of being declassed, are going to show the Tories still at the top that the ruthless, predatory tactics which the founders of most of our great fortunes, colleges and charities used in getting theirs can be used by the leaders of democracy, or of the now fast sinking middle classes, to raid the public treasury, and through it the remainders of the great fortunes. We shall have occasion to revert to this theme, so we need not pursue it at this point through many of its logical interrelations with other social problems under consideration.

The point here is that, while it might be possible within technical safety margins for our currency and bank credit to have the Federal Government run the national debt from its present figure around thirty billion dollars up to a hundred billion before the final currency and credit crash (thus allowing fourteen yearly deficits of the 1935 total to pay for relief or carry the depression-assuming rising prices did not raise the ante) the human element is not going to allow money to be dished out over such a long period in such amounts in that measured rhythm. The new gold rush to Washington is just beginning.

It seems a reasonable inference, from all visible indications, that the chances are about even that liberal capitalism in the United States may, under the drives of pressure groups, fail to maintain order and carry the overhead costs of the depression until our entry into the next war, assuming that event does not occur for four or five years. It is also a warranted inference that, in measure as the internal economic strains become aggravated, an increasing pressure will be put on the President and his associates, more in the area of the subconscious than the conscious, to force them to take the country into war as a face-saving exit from a domestic impasse under the system they are pledged to support. (They are sworn to uphold and defend the social theories of a majority of the judges on the Supreme Court, i.e., the Constitution.) Certainly, the more unemployed men and slack industries there are, the more people there will be to hail with genuine relief our entry into war. For, whatever war might ultimately mean to the individual or group, its outbreak means at once jobs for all the unemployed.

As for the other question, whether we could fight another war under liberal capitalism, the answer must be negative, and its best demonstration found in the present plans of the War Department for mobilizing industry on the outbreak of the next war. Of course, the Army is not interested in profits but in war materials and services for the objective of destroying the enemy. The Army would therefore approve of, or even insist on, a wide margin of profit at the outset in order to insure the best initial effort of management, while the general staff was perfecting its technical control of industry through the installation of army officers in strategic posts in industrial and financial management. But the Army would stand for no nonsense about economic or constitutional freedom for individuals to thwart military plans. And as soon as the mechanics of paying the large paper profits allowed at the start proved a difficulty, the Army would end or modify the profit system as the demands of military success might indicate.

Liberal capitalism survived the last War in Britain and France only because the richest country in the world was a late comer into the conflict and threw all its fresh resources into the effort during and after the War to save Europe from chaos and communism and to preserve the integrity of international and domestic credits. It is commonly overlooked nowadays that there is a vast difference between the situation of the international financial system of August, 1914, and August, 1935. No longer can any power in another world war mobilize foreign credits as did the leading belligerents, particularly on the Allied side, at the outbreak of the last War. Mobilizing economic resources today, or rather in tomorrow’s war, will not be a matter of quickly liquidating securities and claims for cash or of signing I.O.U.’s to be deposited in some foreign government’s treasury (for subsequent repudiation) and drawing against the cash or I.O.U.’s unlimited supplies. No; it will mean establishing a military dictatorship over the factors of production no less complete or absolute than that of communist Russia. The last War found the international bankers ready to make money and lend money. The next war will find the fascist ready to seize power and govern, where they are not already in power. And the fascists of a war-begotten fascism will be men in uniform on whose social attitudes the liberals will be less influential than they might be on the minds of the leaders of a fascism born in peace time. The question, Could the system carry the depression indefinitely if we stay out of the next war? is fairly well answered by the logic of the answer made to the question, Can the system carry the depression up to the next war and keep us out of it? The only reason for specifically formulating what is almost a foolish question, as to the chances for the permanent stabilization of the depression by liberal capitalism under peace, is that such an achievement is the seriously entertained expectation of innumerable conservatives and liberals.

I cannot share that belief, not so much because of the mechanical or institutional difficulties I see in the way, as because of the faith I share with Mr. Hoover and other individualists in the good American predatory and combative instincts. These instincts, with which the Tories, now trying to conserve liberalism, have always been over-endowed, they are wont to call by such euphemisms as “rugged individualism.” My faith in the vitality of American democracy and individualism assures me that we are not going to have any prolonged period of peace with stabilized depression. The democratic movements and pressure groups marching on the public treasury are not, at first, going to fly the banners of fascism or be interested in its values or ideas. So much the worse for the nation at first, and especially for the Tory Constitutionalists and libertarians who will be the favorite targets of these armies of liberty lovers and liberty takers. These movements and pressure groups are going to fly the banners of liberal capitalism, and democracy, Jeffersonian and Jacksonian. And their acts will be in the best tradition of the great empire builders.

In other words, they will be out to crush their opponents and to grab all they can. And how they will uphold their constitutional right to coerce Congress and the constitutional right of Congress to dish out the money of the eastern bondholders who are now so anxious to save the Constitution. States’ rights will be very dear to them, especially the rights of the debtor states to tax the property of absentee owners living in the creditor states of the east.

I hail these movements and pressure groups, not because their members are as yet fascist or friends of fascism, but because they are making fascism the alternative to chaos and national disintegration. I also hail these fellow countrymen with pride that there is too much red blood in American veins to allow of peace with stabilized scarcity, misery and frustration. You cannot stabilize a situation in which the middle classes are being declassed and twenty millions are being carried on relief. There is no finer trait in man than that which makes peace with frustration and defeat impossible. If the elite must suffer misery and frustration, they won’t have it in peace. In conflict they can at least lift themselves out of humiliation, even if not out of misery. And it is the people to whom self respect is important who make history. The best hope of the American masses is that the elite don’t take it lying down and that the elite are a larger percentage of the population in this country and day than in most others.